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The Student Loan Consolidation Option

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  • Deborah Lucas

    ()
    (MIT Sloan School)

  • Damien Moore

    (Congressional Budget Office)

Abstract

The federal government makes subsidized federal financing for higher education widely available. The extent of the subsidy varies over time with interest rate and credit market conditions. A loan provision that has added considerably to the size and volatility of the subsidy is the consolidation option, which allows students to convert floating rate federal loans to a fixed rate equal to the average floating rate on their outstanding loans. We develop a model to estimate the option's cost and to evaluate its sensitivity to changes in program rules, economic conditions, and borrower behavior. We model borrower behavior using data from the National Student Loan Data System, which provides new insights on the responsiveness of consumers to financial incentives.

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File URL: http://humcap.uchicago.edu/RePEc/hka/wpaper/Lucas_Moore_2012_student-loan-consolidation.pdf
File Function: First version, August, 2008
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Bibliographic Info

Paper provided by Human Capital and Economic Opportunity Working Group in its series Working Papers with number 2012-015.

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Date of creation: Aug 2008
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Handle: RePEc:hka:wpaper:2012-015

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Keywords: student loans; federal credit; subsidies;

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  1. Calvet, Laurent E. & Campbell, John Y. & Sodini, Paolo, 2006. "Down or Out: Assessing The Welfare Costs of Household Investment Mistakes," Working Paper Series 195, Sveriges Riksbank (Central Bank of Sweden).
  2. Lance Lochner & Alexander Monge-Naranjo, 2002. "Human Capital Formation with Endogenous Credit Constraints," NBER Working Papers 8815, National Bureau of Economic Research, Inc.
  3. Ravi Jagannathan & Andrew Kaplin & Steve Guoqiang Sun, 2001. "An Evaluation of Multi-Factor CIR Models Using LIBOR, Swap Rates, and Cap and Swaption Prices," NBER Working Papers 8682, National Bureau of Economic Research, Inc.
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